Defence suppliers to earn more for on-time delivery

The Minister for Defence Readiness and Industry has told the House of Commons that reforms to Single Source Contract Regulations will link supplier profits directly to delivery performance, in what he described as a fundamental shift in how the government uses commercial tools to drive supplier behaviour, the UK Defence Journal understands.

Luke Pollard, making a written statement to Parliament on 14 May, said the changes were necessary given the state of defence procurement inherited by the current government. “The House will be aware that we inherited forces that were hollowed out and underfunded — 47 of 49 major defence programmes were over budget and delayed when we took office,” he said, adding that business as usual was not an option at a time when whoever gets new technology to the frontline first wins.

The first tranche of legislation laid before Parliament increases the maximum incentive profit available to suppliers who meet priority outcomes such as faster delivery or greater productivity, rising from 2% to 10% of costs. Pollard stated that the government would be “expecting exceptional performance in return for the higher rate of incentive profit,” with the size and structure of any incentive fee remaining at the government’s discretion within statutory constraints.

Profit floors on lower-risk contracts will be reduced, with Pollard stating this will “powerfully incentivise suppliers to become more productive or to deliver other Government priorities, in order to restore profits to current levels.” The measure is also intended to motivate suppliers to take on more risk-bearing contracts, a commitment made in the Defence Industrial Strategy.

The threshold at which contracts fall under the regulations will rise from £5 million to £25 million, removing nearly all small and medium-sized enterprises from the regime. Pollard said small and novel products had “often delivered the greatest successes” and that lifting the regulatory burden on smaller firms was essential to maximising results from that part of the supply chain. An Innovation Uplift will also be introduced to reward firms that invest their own money in developing products without a guaranteed contract or upfront government funding.

The Single Source Contract Regulations govern contracts placed without competitive tender and account for around half of defence spending on equipment. A further statutory instrument covering the profit floor changes, the Innovation Uplift, and the increased threshold will be introduced before the summer recess.